Fourth quarter profits are over the top but not natural gasproduction figures, according to a preliminary analysis of U.S.companies. Overall, the majors and the independents showed stunningmonetary gains in the final quarter of last year, but theproduction levels for many of the larger independents were actuallylower than those recorded in the third quarter.

One factor that may have contributed to some of the largercompanies’ fourth quarter decline could be related to asset salesand acquisitions related to the many mergers of 2000. Also cited asfactors were the weather, which was colder and wetter in someproduction areas, as well as the natural decline in some regions.

According to a recent study by Lehman Brothers of 20 of thelargest natural gas producers, which account for about 40% ofdomestic production, fourth quarter production was down 0.8% fromthe third quarter. Perhaps more significant is that production wasdown 3.7% from the fourth quarter of 1999. Even though some of thelargest producers have yet to report, BP Amoco PLC, for instance,doesn’t report until later this month, the study is significantbecause it shows that while natural gas demand has never beenhigher, production appears to not be ahead of the curve.

Many companies reported totals with flat or declining productiongrowth into the fourth quarter, which puzzled analysts, who hadexpected to see higher production figures in a quarter where recordprofits were streaming in from higher commodity prices.

Another surprising tally is in the drilling figures. BakerHughes Inc. reported that 879 rigs were actively drilling fornatural gas in the third week of January, up 41% from the sameperiod a year ago. However, while drilling activity is higher, thegas reserves being targeted are actually smaller in size and thedecline rates are higher.

In the Lehman study, companies that produced at least 15.1 Bcf/din the fourth quarter were about 2.6% off. “From quarter toquarter, production fell by 100 MMcf/d,” said Lehman analyst TomDriscoll. “Year-over-year production is down 3.4%.” Once all of thefinal figures are in, the gap may be much tighter.

In some of the companies’ fourth quarter reports, there arevalid reasons for a slowdown in production late in the year.Anadarko Petroleum Corp., which announced its record earnings lastweek, said that “production from the Gulf of Mexico and Alaskafields began later than we had expected and this caused us torecord slightly lower production volumes than anticipated for thefourth quarter.”

Still, Anadarko’s results couldn’t be called shabby. Its totalyear-end production was actually up 124%, standing at 112 MM boe.In 1999, the total was 50 MM boe, with the increase attributed tothe acquisition of Union Pacific Resources and increased productionat operations in Texas, Louisiana, Kansas and Algeria.

Texaco, which saw its production decline 12% in the fourthquarter, attributed the decrease to the natural decline rate in itswells. At Kerr-McGee, fourth quarter production was down almost 13%from a year earlier, and it also reported overall lower year-endproduction.

However, not every company drew a loss in the fourth quarter.Some, in fact, are reporting production figures to match hugeprofits. Apache Corp., which reported its earnings last week,jumped its fourth quarter natural gas production 28% to 934 MMcf.Apache has followed an “acquire and exploit” policy in recentyears, buying up underutilized oil and gas assets and working themharder to raise production. Last year, the Houston-basedindependent spent more than $1.5 billion to acquire oil and gasproperties, mostly U.S. and Canadian natural gas properties.

Devon Energy, based in Oklahoma City, said last week that itsdomestic gas production grew 9% in the fourth quarter from a yearearlier. Mitchell Energy & Development Corp. also saw itsproduction up in the fourth all from the Barnett shale region ofEast Texas, and Cabot Oil & Gas also reported a slight increasein gas production in the final quarter.

Coastal Corp.’s production was up 16% in the final quarter —it had a 42% rise over the year. And Chevron also was up for theentire year and in the fourth quarter, reporting it produced 3,571MMcf/d in the fourth compared with 2,591 MMcf/d in 1999.

Noted in the study are dry hole expenses, and based on thosefigures, companies appear to be drilling wells in the samegeographic areas that have been producers in the past, but thoseregions tend to produce less over time. The decline in dry holeexpenses usually indicates that fewer exploratory wells are beingdrilled.

Several things have contributed to the lower production figures,say industry analysts. Among other things, because natural gas isdifficult to ship, most of the gas used in the United States isproduced here or imported from Canada. In the past several years,technology has helped producers to obtain more gas from olderfields in the United States, Canada and offshore in the Gulf ofMexico.

However, new technology is at its peak — for the moment anyway— and older fields are losing reserves faster than companies canfind new gas deposits.

More federal and state regulations also have restrictedexploring and developing new regions, a factor that may be changedwith the Bush Administration. John Sharp, vice president forfederal and state affairs for the Natural Gas Supply Association,said industry is “fighting depletion of wells and we’re fightinglack of access.”

Though lagging in recent months, nearly all domestic producersare upping the ante in their E&P programs beginning this year,setting record capital budgets to spend more. Dallas-based PioneerNatural Resources Corp. expects to increase its production thisyear only slightly, 1% to 4%. Then, in 2002, with plans firmly inplace Pioneer expects to jump production between 15% and 25%. Someothers are predicting accelerated results.

Apache said it will ramp up production 30% in 2001 over 2000,spending approximately $1 billion on E&P. And Anadarko alsoannounced it would increase its first quarter 2001 daily productionvolumes by about 3% over fourth quarter volumes. Anadarko’sprojected increase in first quarter production will come from theAlpine field in Alaska, which came on stream in November. Anadarkoholds a 22% stake in the field.

In the months ahead, the American Gas Association expects acomplete turnaround with record production from majors andindependents alike.

“As of six months ago, they (producers) were projecting a muchsmaller increase,” said AGA vice president Roger Cooper. “So, theydo see this drilling boom as bringing more gas to market. Butessentially, we are in a very tight race right now. We’re in atight race between increasing demand and increasing supply. And thesupply market’s trying to catch up with the demand market.”

The Natural Gas Supply Association also expects new supplies ofnatural gas to come on line in the next 12-24 months. But how much?Because so many delayed spending in the downturn in 1997, it’sdifficult to ramp up as quickly. Because of that, some predict thatoverall, U.S. gas production in 2001 will rise only 2%.

Carolyn Davis, Houston

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